You’ve got to credit financial markets with a certain knack for seeing what’s going on before anyone else. They accurately predicted Donald Trump’s resounding victory in the US election when pollsters, right up to the last minute, told us it was drifting the way of Kamala Harris.
But what then are we to make of their champagne cork-popping reaction to the biggest vote against globalisation in history, to a vote that could encircle the US economy in tariffs, potentially triggering global trade wars on a scale we’ve never seen before?
The S&P 500 and Nasdaq Composite both set new record highs last Wednesday in the wake of the US vote, jumping 2.5 per cent and 3 per cent respectively. Even European indices went up, initially anyway, before falling back.
Germany’s Dax was perhaps the sole loser, falling by 1.1 per cent but only because it was dragged lower by carmakers, BMW, Mercedes and Volkswagen, which are in the crosshairs of Trump’s tariff plan.
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Why didn’t markets, like most Western governments, take more of a fright at the brewing protectionist storm in Washington?
Trump will use tariffs, or at least the threat of tariffs, to improve the US trade balance and boost domestic manufacturing. The “Trump trade” is also being driven by the promise of less tax and regulation which the president-elect claims limits job creation.
But this short-term sugar rush could quickly turn sour. If Trump, even partially, carries out his threat to impose tariffs of 10-20 per cent on all goods coming into the US from Europe and elsewhere and up to 60 per cent on those coming from China, the world’s economy could, in US slang, be thrown for a loop.
And if Europe’s car industry looks like the most vulnerable sector on this side of the Atlantic, the European country with the most skin in the game – on paper at least – is Ireland.
Irish goods exports to the US last year were valued at €54 billion, accounting for close to one-third of the State’s total goods exports. They also accounted for one-eighth of the EU’s total exports to the US, reflecting Ireland’s outsized exposure to a potential tariff war between the EU and the US.
The bulk of the €54 billion – €40.4 billion equating to almost 75 per cent – relate to chemical or pharma products, which, in the main, are produced by US multinationals operating in Ireland.
Ireland is a global hub for pharma and medtech, playing host to 24 of the top 25 biggest names in the sector, including most of the big US players, including Pfizer, Johnson & Johnson, BMS and AbbVie.
A question then arises as to whether Trump’s proposed tariff plan, if it materialises, would apply to US companies with Irish operations that sell goods back to US. The answer to this question would go some way to highlighting Ireland’s potential exposure but we have no eyes on Trump’s plan at this stage.
The goods exports also include approximately €1.4 billion of food and drink (mostly whiskey and dairy). The last time he occupied the White House, he slapped about $7.5 billion worth of tariffs on a range of EU products, including a 25 per cent tariff on Kerrygold butter, the flagship brand of Irish dairy exporter Ornua.
This was estimated to have cost the company about €50 million in a single trading year. It also led to a significant price hike in Kerrygold butter in the US, damaging sales.
Trade tariffs will make foreign products more expensive for Americans, prompting customers either to buy local alternatives or suck up the higher price.
Economists across the board are warning that Trump’s tariff plan will lead to higher consumer prices and accelerated inflation, something of an irony given Trump’s electoral win owes much to the anger felt by ordinary Americans about inflation.
According to several estimates, 10 per cent tariffs on all imports could add 1 per cent to US inflation. “If you add 1 per cent to next year’s inflation numbers, we should say bye to rate cuts,” Andrzej Skiba, managing director and head of US fixed income at RBC Global Asset Management, said.
Ireland’s growing reliance on US multinationals means we’re invested in US economic policy to a precarious degree. Trump has also mooted the idea of cutting US corporation tax from 21 per cent to 15 per cent in a bid to divert investment back home at the expense of countries like Ireland (it would remove the current tax differential between the US and Ireland) but such a move could explode the already ballooning US budget deficit, making it a tough sell for the incoming president.
Ireland has spent the last decade and half fretting about the potential retreat of foreign investors and a sudden shock to corporate tax while watching both foreign direct investment and corporate tax earnings climb to unimaginable levels. Will Trump end the State’s winning streak?
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